What Are Commercial Mortgage-Backed Securities?

Commercial Mortgage Backed Securities (CMBS) is a financing method of real estate securitization, which repackages a variety of commercial real estate mortgage loans and issues them to investors in the form of bonds through the securitization process. This product has the advantages of low issue price, strong liquidity, and full use of real estate value. Therefore, in the 25 years since its introduction, it has grown rapidly in the global real estate financial market and a new option for real estate developers to raise funds in addition to traditional bank loans. Taking the US region as an example, commercial mortgage-backed securities currently account for one-third of the commercial real estate financing market.

Commercial mortgage-backed securities

Commercial Mortgage Backed Securities (CMBS) is a type of real estate securitized

Compared with other financing methods, CMBS has the advantages of low issue prices, strong liquidity, diversified lenders, no recourse to the parent company, release of commercial real estate value while maintaining future growth potential and off-balance sheet financing Wait. Benefits for securities sponsors:

• Turning relatively illiquid financial assets into liquid, tradable financial assets;

• The sponsor can supplement its funding sources, which can be used for refinancing activities;

• Provide sponsors with more efficient and lower-cost sources of financing;

• Provide diversified sources of financing for sponsors by providing financing options for traditional debt and asset financing formats;

• Issuers can more easily transfer assets from their balance sheets, helping promoters increase various financial ratios and use capital more effectively.

• Benefits for investors:

• Able to provide higher yields than government bonds of the same maturity;

• The infinite diversity and flexibility of credit, term and payment structure enables investment products to be tailored to meet the individual needs of different investors.

As a financing method, CMBS also has risks, which are mainly manifested in several aspects:

• credit risk

The credit risk of CMBS mainly refers to the default and default of the borrower. The factors affecting the default or default include:

• Borrower's operating income Borrower's operating income depends on the operating capacity of the lessor and the rent payment of the lessee, but both are affected by the real estate market: if the market is good and the vacancy rate is low, the renter's rent payment will Guarantee that borrowers are less likely to default or default.

• The shorter the duration of the lease contract and the termination of the lease contract, the more re-leasings will be required, and the transaction costs will increase accordingly. This has also increased the instability of property rental levels and ultimately led to an increase in default or default. In addition, if the lessee terminates or cancels the lease contract, it will also adversely affect the cash flow.

• Basis point risk refers to the gap between interest on mortgages and interest paid on securitization. These risks mainly come from the inconsistent frequency of interest rate adjustment and the mismatch of mortgage assets (referring to the use of fixed-rate mortgages to support floating-rate securities or the use of adjustable-rate mortgages to support fixed-rate securities).

• Prepayment risk

Early repayment risk refers to the risk caused by the borrower's behavior of partially or fully repaying the loan principal before the loan contract expires. It is a type of risk that most securitization transactions must pay attention to.

In commercial real estate mortgage loans, the factors that cause early repayment may be the economic boom or the prosperity of the real estate area, which has led to the appreciation of real estate, increased rental income, and decreased market interest rates. However, because the term of a commercial real estate mortgage loan is much shorter than a home mortgage loan, even if the borrower can repay in advance through refinancing, the income obtained is relatively low, so the incentive for the borrower to repay in advance is not sufficient .

• Other risks

Other risks are mainly related to the cash flow management capabilities of service providers. If the service provider does not manage the cash flow well, it will be difficult to ensure a correspondence and matching relationship between the rents collected and the cash flows payable, and the risk of the transaction will increase.

Judging from the current trend, with the success of financial asset securitization transactions in the United States, other countries have successively introduced this emerging financial instrument, and the development potential is great. But at present, the most mature and developed CMBS market is still the United States, and Asian and European countries are still in the initial stage of CMBS development.

In November 2005, the CBRC website published the Measures for the Pilot Supervision and Administration of Credit Asset Securitization of Financial Institutions, which means that CMBS, as a credit asset securitization product, has already had a preliminary legal framework for its issuance in China. Recently, Wanda's commercial real estate project was financed by asset securitization of $ 145 million. This is the first commercial real estate asset securitization product in mainland China. The transaction involved 9 large commercial retail real estate projects in several provinces in eastern China. The transaction was initiated by Macquarie-Wanda Real Estate Fund, a large real estate investment fund registered in Bermuda that invests in commercial real estate projects in China. The assets in the transaction are mainly large-scale retail supermarket real estate. The tenants of these real estate projects are internationally renowned retail companies such as Wal-Mart and Parkson.

Whether the success of the Wanda case proves that certain conditions are already available for the development of CMBS in China, not long ago, Professor Lawrence Longwa, an international real estate finance authority and the School of Real Estate at New York University, stated clearly: "In China, CMBS may be easier to implement than REITS. "With the continuous tightening of real estate financing and the introduction of new foreign real estate financing methods in China, Professor Langwa's remarks immediately caused many real estate developers to pay great attention to the new concept of" CMBS ". Dr. Zhang Wei, assistant director and researcher of the Research Center for Financial and Industrial Development of Peking University, believes that the current implementation of CMBS in China may not have advantages, and implementation in China's current economic environment will be subject to various conditions. First, the issue of basic assets. The source of funds repaid to CMBS investors is loans from real estate developers and property operators provided by banks or similar bank credit institutions. "An important principle of asset securitization is standardization. At present, the demand for housing mortgage loans in the domestic real estate financial market is basically real. Its contracts in the same credit institution basically meet the requirements of standardization, but there are quite a few of them in commercial real estate loans. Big difference. Some developers really want to do it, some are half-way monks, some just want to get a ticket and leave ... the difference of the contract is too big to be solved in a short time. So the scale of CMBS cannot reach At a certain level, its economic effects will naturally not be obvious. "In the macro environment, Zhang Wei believes that the state's big policy of controlling real estate loans will also be difficult to change in the short term. If CMBS is vigorously promoted, it is equivalent to encouraging real estate developers to raise funds while compressing real estate loans.

The lack of laws and infrastructure is also a major obstacle to the implementation of CMBS in China. At present, the status of asset securitization is not covered in the Company Law. "The construction of the secondary market has not reached a very good level. Why does the United States have the largest asset securitization market? It is because it has a very good secondary market and has established a very good exit mechanism. This also makes the US asset securities The market is an important factor second only to the national debt market. "Zhang Wei said," In addition, tax issues are also a key reason for restricting asset securitization. How to avoid double taxation, future dividend tax and income tax treatment will affect asset securities. Impact on the process. "

From the perspective of the purchaser, theoretically, domestic investment institutions have a strong demand for CMBS fixed income securities. Because the buyers of CMBS are mainly institutional investors such as pension funds, life insurance, and hedge funds, they need to buy products with relatively low risks, relatively stable returns, and relatively long maturities. "But from the actual situation, it is still subject to certain conditions. On the one hand, these institutional investors have a wait-and-see attitude towards the creditworthiness of Chinese CMBS products. On the other hand, these institutional investors have no practical experience themselves. Acceptance has a process. "

Like REITS, CMBS is a "looking beautiful" financing method. The key issue of asset securitization lies in the legal system, whether it can guarantee risk isolation, and the return on assets is not affected by the promoters. Transformation also requires a process. As a new commercial real estate financing method, with the continuous improvement of China's relevant legal system, it may become one of the main financing methods. It is still in the wait-and-see stage of the market. It will not be truly suitable for China's market until it is continuously improved and tested Means of financing.